Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for April 20th, 2010

When the President of a country is his own Press Secretary, it becomes difficult to sort out the news in detail, because in this particular case, there are seldom questions and/or clarifications. Such was the case of the multiple announcements this week on new agreements between Venezuela and China both on oil exploration in the Junin 4 heavy crude oil field and a loan of US$ 20 billion given by China to Venezuela. All of these announcements were supposed to be part of high level agreements signed between Chavez and the Chinese President Jintao, during the latter’s visit, but the Chinese earthquake forced him to cancel his visit and the whole affair lost some of the thunder Chavez wanted to have.

Typical of the confusion is this news item from UPI, which only adds to the confusion since after a headline of the Chinese lending Venezuela US$ 20 billion, says the highlight of the deal is the US$ 16.3 billion investment in the Junin 4 field.

The two things have nothing to do with each other, they are two separate deals which are much different in nature. Let’s eal with them separately:

1) The PDVSA-China Junin-4 deal: This is nothing new, the Junin 4 field had been assigned to the Chinese company CNPC quite a while back, terms had been agreed to, this was just the formal signing and announcement of the bonus to be paid. As an example, Reuter published this summary of the Junin field at the beginning of April including the part about Junin-4 being assigned to the Chinese company, production levels, etc.

The only question is the usual one: PDVSA announces a huge investment, in this case US$ 16.3 billion, but PDVSA has to put up 60% of that, in this case US$ 9.78 billion. It sounds great, but where is the money going to come from, as I discussed in a previous post. This is something not even Ramirez can answer, his and the administration’s management style seems to be “oil and God will provide”. PDVSA is in the end a typical Venezuelan family.

2) Then, we come to the US$ 20 billion, ten year loan. Sounds great, no? At a time of tight cash flow and foreign currency problems the Chinese advance you the not irrelevant amount of 20 billion dollars.

which makes it clear the loan will be paid with oil, but “wholesale financing loan” is a strange term.

While I may not understand it, many interpret this as the Chinese giving Venezuela US$ 20 billion now, to be paid in dollars. With this, Venezuela’s foreign currency deficit for the year is no longer an issue, Morgan Stanley’s concerns get pushed until at least 2011.

“framework agreement on financing” under which the China Development Bank (CDB) will provide a USD 10 billion loan and other credit amounting to 70 billion Yuan (USD 10.25 billion)” (note that when you subtract the 10.25 billion yuan, you get almost exactly what PDVSA needs to finance its shares of the Junin-4 field, is that all Venezuela is getting, Junin’s financing over the years plus the Yuans for Chinese purchases?)

So, over half the credit is now in Yuan, a non-convertible currency, last I heard. And “other credit” sounds like loans to buy Chinese products in Yuan, if I am reading this correctly. But really, I am not sure, it is all very fuzzy. Ramirez also said PDVSA will not need to issue new bonds in 2010, which is good news for Venezuela and PDVSA bonds, but immediately said that PDVSA was looking into financing from banks to the tune of US$ 1.5 billion in the next few months.

Once again, It may be as high as US$ 21.5 billion or as low, as…anybody’s guess. Are the US$ 10 billion of the US$ 20 billion not in Yuan a one time ten year loan? It sounds like it, but I can’t swear to it.

So, it appears as if: Venezuela signed a project for US$ 16.3 billion with China and received US$ 20 billion in financing from China. But, about half of that (the 20 billion) is in Chinese local currency and the other half, happens to be exactly what is needed in financing for PDVSA to fund its share in Junin-4.

But I don’t know which one it is. Does anybody outside the Government?

Footnote: My next post was going to be on the Guri dam and the electric problem. I was going to estimate how much rain we needed to have the dam in good shape for 2011 and talk about the funny statistics of Opsis which at some point made me doubt that I was right in thinking there would be no collapse in 2009. But then I saw this post in this very professional new blog about Venezuela called Setty’s Notebook and it made no sense to duplicate. Please check it out!